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Yuan Strikes Back

Daily Analysis - 04/06/2017

Chinese Currency Reverses Longstanding Downturn

Even amid the backdrop of weaker manufacturing fundamentals, the Chinese Yuan stormed higher last week after moves by policymakers to ease liquidity conditions and changes made to the methodology for setting the currency’s fix against the US dollar.

Last Week

With important fundamental figures related to Chinese economic momentum due in the sessions ahead, the latest manufacturing data from China suggests that the pace of growth in the world’s second largest economy is still decelerating. The official manufacturing PMI managed to stay in expansionary territory while the Caixin PMI slipped into contraction for the month of May. Nevertheless, the Yuan experienced significant gains, with the offshore Yuan climbing to a 6-month high against the US dollar. Although Chinese manufacturing activity slipped, PMI’s remained mostly flat in Europe, with the aggregate figure staying on hold while Germany and Spain improved as Italy and France saw the pace of expansion slow.

More concerning was declining inflation, a development likely to postpone any tapering of ECB asset purchases. Switching gears, US nonfarm payrolls miss estimates by a wide margin, coming in at 138,000 jobs added for the period compared to a downwardly revised 174,000 positions created a month earlier. The benchmark unemployment rate unexpectedly trickled down to 4.30%, the lowest recorded level since 2001. However, this last development was the result of lower labor force participation which is not a positive indication. Weaker job creation was dismissed by equities, with key US stock benchmarks closing out the week at record highs.

The Week Ahead

The predominant focus of the sessions ahead will be approaching interest rate decisions and GDP announcements. Starting out, the Reserve Bank of Australia is set to release its latest monetary policy decision on Tuesday, with expectations for no change in interest rates. GDP and trade figures will also be announced, with growth forecast to slow measurably to 0.20% quarterly growth and 1.60% annualized growth. With concerns about China still intact, the trade surplus is also expected to narrow modestly. Trade figures will also be announced for China, with the surplus projected to widen slightly.

Apart from trade, China will also be releasing consumer price inflation numbers, with the headline CPI result forecast to decelerate to a 1.10% annualized pace in May. In a positive sign for policymakers, a Japanese GDP report due this week is likely to be revised higher according to consensus estimates for the first quarter. Shifting gears, the Euro Area will be announcing first quarter GDP figures, with no major changes expected compared to the second reading. Furthermore, the ECB Governing Council is unlikely to adjust policy in any major way in the upcoming decision. To cap off the week, the UK will be holding general elections on Thursday, with the Conservative Party rapidly losing ground according to the latest polling.

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